Every insurance professional paying attention to market trends will likely have come across the terms ‘hard market’ of ‘firming of rates’ in recent conversations, business meetings, industry press, and so on. In the insurance industry, a hard market is the upswing in a market cycle, when premiums increase and capacity for most types of insurance decreases. This can be caused by a number of factors, including falling investment returns for insurers, increases in frequency or severity of losses, and regulatory intervention deemed to be against the interests of insurers.
Hard Market Characteristics
In a hard market, there’s less desire for growth and more of a restriction in the marketplace as insurance companies re-evaluate their books of business, their risk appetites, and how much capacity they want to present in the marketplace. In hard market conditions, underwriters often adhere to stricter standards in an attempt to correct any adverse loss ratios developed during soft market conditions. As a result, insurance rates often go up, the amount of limit carriers are willing to provide decreases, and the number of players in the market restricts. This makes it harder for insureds and their agents to find coverage options, which means the carriers that are offering coverage can push up their rates.
The Projections Explained
Commercial property policyholders will see ongoing price increases and cuts in capacity through 2020, as insurers maintain discipline, making for a difficult market, industry experts say. Rates have increased across the board in property, though the level of increase varied by geographic location, catastrophe exposure and loss history by individual account.
The level of increase is driven by where the insured property is located, what kind of losses they’ve had and what kind of catastrophe losses they’ve had, in addition to attritional losses. We’re seeing double-digit rate increases across the portfolio, but the level of rate increase varies.
Tough Occupancy Classes
There’s not expected to be much pricing relief for the market in the first half of 2020. Tougher occupancy classes of property include residential real estate, hospitality, and metals, foundry and any kind of molten exposure, as well as accounts with forest or woodworking type exposures. Insurers are putting out less limit than they have in prior years and on a general basis cutting back 20% to 50% in their limits than before. The more difficult the occupancy, the more you see a limit pullback.
Property insurers are retreating in some catastrophe-exposed areas. Carriers are strictly following their disciplined underwriting guidelines as well as the modeling to determine how much capacity they can put out for catastrophe-exposed accounts. Terms and conditions, and wordings, also continue to narrow, especially for catastrophe-exposed property accounts.
In places where there is more catastrophe exposure, risk managers are being forced to take more risk. They’re not going to be given the opportunity to continue to take lower deductibles. Carriers will force the higher deductibles onto them as a risk-sharing mechanism. In areas outside of catastrophe zones, risk managers will have the opportunity to see some savings on their premiums especially if they’re in highly protected risks.